The Ombudsman ruling that finds against a leading stockbroker for the manner in which it appears to have provided investment advice to one credit union on perpetual bonds has certainly livened things up. Much has been written with links to various articles included in the media section of this blog.
One aspect however remains largely unspoken of. That is the ILCU and its public pronouncement that perpetual bonds were appropriate investments for its member credit unions to make. Indeed its internal communications were extensive in fulsome praise of the income possibilities that these bonds provided. Much of its communciations material, it seems was not written by it, as it didn’t have the expertise. So certain was it, that it even invested some of its savings protection fund in perpetual bonds. Which now must seem a bit like betting your Granny’s nest egg at the Galway Races.
But let’s forget about the bonds for a moment and look at the ILCU itself. It is not a company at all. Despite its annual report and accounts talking up “Group” performance it remains an unincorporated body. It is, in other words, a club for credit unions. A co-operative of co-operatives. (Or as one wag put it, a club for credit union voluntary directors…but that’s another story).
Now this club is managed by a club committee referred to as a Board of Directors. But the club can only act on its members behalf. It doesn’t have a separate existence. Its members tell it what it can do and agree to be bound by its actions providing they are in keeping with the actions agreed in the “book of rules”. Of course custom and practice is also an aspect of its modus operandi.
This club committee entered into an arrangement whereby the club would provide services to its members. Services, its members agreed to use and pay for. It just so happens that the club gets a little of what they pay by way of fee, or commission or administration charge from the service provider. This income covers its expenses along with its annual membership fee. It runs a benevolent fund for troubled members into which they must also pay and it is assumed the club benefits also.
One of these services was investments. The club entered into an arrangement with a reputable stockbroker to provide investment services both to it and its members. The club is a partner in this business arrangement. Jointly it created a service called Central Investment Management or CIM for short. The relationship, it seems, is such that the club takes money from its members through its own accounts and passes this onto the stockbroker. It accepts and transmits orders for money. It gets paid for doing this. It’s about .16% of all the money its members have invested with the stockbroker, which is about €2.1bn give or take a few euro.
The members because they have agreed that the club should do this, trust the club and also of course trust the service provided. Over time, they have become very familiar and satisfied with the service. A custom and practice grew where members would invite the stockbroker down to have a meeting and provide it with the opportunity of discussing its latest offering. The club even allowed the service provider to not only tell its members how their central fund was doing but to also tell the members about other investments on offer through its communications channels. All this was done under the umbrella of the Central Investment Management service. The club members it seems believed the additional investments were all part of the central service and the club supported this perception.
The club is in effect the collective of members working together for their mutual benefit. Is it not the case then that the member and club are indistinguishable from one another? Could it be the case that the member is bound by and through their own actions which through custom & practice binds them to the actions of their club when using services designed for their use and agreed by them? Could it be the case that as the club committee announced that perpetual bonds were appropriate that the club member could act accordingly?
Could it be the case that the relationships between stockbroker and club are altogether different to that of “personal client – investment adviser” but in fact more of an outsource business relationship with one providing services the other would prefer not to provide itself – or that its members would prefer the club didn’t provide but outsourced. If this is the case then what jurisdiction, if any did the Ombudsman have ? Could the Ombudsman have adjudicated on a business transaction that falls outside the scope of private investor - investment advisor relationship ?
There are of course other considerations here. The most obvious of which is the fact that credit unions are regulated financial firms – credit institutions. Their boards have a ficuciary duty of care to ensure the firm has the necessary expertise and competence to carry on the business of a credit union. Indeed the law provides for credit unions to invest, albeit restricting them to the Investment Trustee Order. The implication is they have the wherewithal to make decisions based on a competence to do so. Sure the Regulator issues more restrictive guidlines in 2006 but they have no statutory basis. Sure also the Regulator considers credit unions as "private investors" but its dosenlt have the powers to enforce this consideration.
Is not the presumption that the board will provide for the expertise to make decisions on investments. Indeed can a board of a credit union rely on the protection of “private investor” or what has been called “layman” status even where its members are laymen ?
Surely on being appointed a credit union director, a person loses their layman protective cloak and takes on a cloak of an all together different fiduciary hue. If not then could it not call the entirety of board duty of care into question – were does the boundary of private citizen stop and board director take over? Can it be said that boards are not responsible for decisions made concerning the purchase of all professional services or lending decisions for example loans to incorporated bodies?
If the Ombudsman is right and credit union directors and management are laymen – then what is the ILCU but a club for credit unions who are populated by laymen ? Sre credit unions merely layman business entities ? Could it be a decision rooted in a consideration of what credit unions were prior to 1997, rather than what they have become or should be today ?
Surely credit union boards and their management are accountable and responsible for ensuring they have the expertise to carry on the business of a credit union which has always included making investment decisions. Whether they actually have the expertise to do so, seems to be another issue altogether.
The stockbroker may well win its HIgh Court appeal, bouncing the issue back where it may well belong in the lap of credit union boards, their management, trade bodies and regulator.
One aspect however remains largely unspoken of. That is the ILCU and its public pronouncement that perpetual bonds were appropriate investments for its member credit unions to make. Indeed its internal communications were extensive in fulsome praise of the income possibilities that these bonds provided. Much of its communciations material, it seems was not written by it, as it didn’t have the expertise. So certain was it, that it even invested some of its savings protection fund in perpetual bonds. Which now must seem a bit like betting your Granny’s nest egg at the Galway Races.
But let’s forget about the bonds for a moment and look at the ILCU itself. It is not a company at all. Despite its annual report and accounts talking up “Group” performance it remains an unincorporated body. It is, in other words, a club for credit unions. A co-operative of co-operatives. (Or as one wag put it, a club for credit union voluntary directors…but that’s another story).
Now this club is managed by a club committee referred to as a Board of Directors. But the club can only act on its members behalf. It doesn’t have a separate existence. Its members tell it what it can do and agree to be bound by its actions providing they are in keeping with the actions agreed in the “book of rules”. Of course custom and practice is also an aspect of its modus operandi.
This club committee entered into an arrangement whereby the club would provide services to its members. Services, its members agreed to use and pay for. It just so happens that the club gets a little of what they pay by way of fee, or commission or administration charge from the service provider. This income covers its expenses along with its annual membership fee. It runs a benevolent fund for troubled members into which they must also pay and it is assumed the club benefits also.
One of these services was investments. The club entered into an arrangement with a reputable stockbroker to provide investment services both to it and its members. The club is a partner in this business arrangement. Jointly it created a service called Central Investment Management or CIM for short. The relationship, it seems, is such that the club takes money from its members through its own accounts and passes this onto the stockbroker. It accepts and transmits orders for money. It gets paid for doing this. It’s about .16% of all the money its members have invested with the stockbroker, which is about €2.1bn give or take a few euro.
The members because they have agreed that the club should do this, trust the club and also of course trust the service provided. Over time, they have become very familiar and satisfied with the service. A custom and practice grew where members would invite the stockbroker down to have a meeting and provide it with the opportunity of discussing its latest offering. The club even allowed the service provider to not only tell its members how their central fund was doing but to also tell the members about other investments on offer through its communications channels. All this was done under the umbrella of the Central Investment Management service. The club members it seems believed the additional investments were all part of the central service and the club supported this perception.
The club is in effect the collective of members working together for their mutual benefit. Is it not the case then that the member and club are indistinguishable from one another? Could it be the case that the member is bound by and through their own actions which through custom & practice binds them to the actions of their club when using services designed for their use and agreed by them? Could it be the case that as the club committee announced that perpetual bonds were appropriate that the club member could act accordingly?
Could it be the case that the relationships between stockbroker and club are altogether different to that of “personal client – investment adviser” but in fact more of an outsource business relationship with one providing services the other would prefer not to provide itself – or that its members would prefer the club didn’t provide but outsourced. If this is the case then what jurisdiction, if any did the Ombudsman have ? Could the Ombudsman have adjudicated on a business transaction that falls outside the scope of private investor - investment advisor relationship ?
There are of course other considerations here. The most obvious of which is the fact that credit unions are regulated financial firms – credit institutions. Their boards have a ficuciary duty of care to ensure the firm has the necessary expertise and competence to carry on the business of a credit union. Indeed the law provides for credit unions to invest, albeit restricting them to the Investment Trustee Order. The implication is they have the wherewithal to make decisions based on a competence to do so. Sure the Regulator issues more restrictive guidlines in 2006 but they have no statutory basis. Sure also the Regulator considers credit unions as "private investors" but its dosenlt have the powers to enforce this consideration.
Is not the presumption that the board will provide for the expertise to make decisions on investments. Indeed can a board of a credit union rely on the protection of “private investor” or what has been called “layman” status even where its members are laymen ?
Surely on being appointed a credit union director, a person loses their layman protective cloak and takes on a cloak of an all together different fiduciary hue. If not then could it not call the entirety of board duty of care into question – were does the boundary of private citizen stop and board director take over? Can it be said that boards are not responsible for decisions made concerning the purchase of all professional services or lending decisions for example loans to incorporated bodies?
If the Ombudsman is right and credit union directors and management are laymen – then what is the ILCU but a club for credit unions who are populated by laymen ? Sre credit unions merely layman business entities ? Could it be a decision rooted in a consideration of what credit unions were prior to 1997, rather than what they have become or should be today ?
Surely credit union boards and their management are accountable and responsible for ensuring they have the expertise to carry on the business of a credit union which has always included making investment decisions. Whether they actually have the expertise to do so, seems to be another issue altogether.
The stockbroker may well win its HIgh Court appeal, bouncing the issue back where it may well belong in the lap of credit union boards, their management, trade bodies and regulator.
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